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Segun Olakoyenikan

Rachel Butt

Scores of troubled companies that got financial lifelines during the easy money era are taking advantage of loopholes in their credit documents, with this year’s count of liability management exercises in the US already outpacing the entire volume in 2023.

Given the popularity of such transactions, 9fin is launching a series focusing on sharing data-driven insights and trends on LMEs, which are defined as transactions that help a stressed or distressed company manage its debt burden, typically through reshuffling assets, exchange offers and/or financing raises, without going through a full-scale restructuring or bankruptcy.

In the first article of this series, 9fin found that the vast majority of troubled companies that have initiated LMEs this year turned to their existing lenders to raise new money. Case in point: cash-strapped Alvariaraised $80m from its existing lenders in what some describe as a double-dip LME transaction, cutting the Abry Partners-backed company’s debt by $50m. And Symphony Technology Group-backed Magenta Buyer (dba Trellix and Skyhigh) closed a new money injection and exchange offer after reaching a deal in principle with an ad hoc lender group and major debtholder Elliott Management.

According to multiple sources who work at firms with special situations dedicated teams looking to provide new money in situations for which they are not already a current lender, company advisors solicit proposals in nearly all of the deals. It’s just that existing lenders are ultimately able to offer the best terms, largely because of the ability to exchange existing debt at a discount and at least partially delever. The benefits of going with the existing lender proposals include economics and companies’ desire to maximize participation while averting litigation risks, multiple market participants and restructuring advisors said.

"One of the big reasons for most of these LMEs printed in the market nowadays is that they’re looking for liquidity and discount capture,” said Scott Greenberg, partner in Gibson Dunn and global chair of the firm’s business restructuring and reorganization practice group. “As opposed to a third party play, the trump card for existing lenders is the ability to offer discount and competitive economic terms on the new money.”

Another motivation for existing creditors to participate — especially those with smaller positions and with less say in creditor group dynamics — is simply not wanting to be left behind. Often times, advisors to companies and sponsors are reaching out to existing lenders with the threat of potential third party investors swooping in.

Such threats often motivate existing lenders to propose or ink deals that entail capital at similar terms as third parties’ and taking a loss on their holdings, instead of getting pushed to the bottom of the capital structure. As for sponsors, this helps preserve their longstanding relationships with creditors of their portfolio companies.

“So much of the broadly syndicated market has now concentrated in a small handful of institutional investors that sponsors don’t really want to blow up their term loans or secured notes if they don’t have to,” said Damian Schaible, co-head of restructuring at Davis Polk.

Ongoing legal brawls could dampen appetite for private equity sponsors, companies and certain investors in engaging in aggressive financial maneuvers, sources said.

A prominent case is Incora, which has been waging an almost a year-long battle over an LME that took place in 2022. This July, a bankruptcy judge ruled that the $250m of new money injected into the aerospace supplier in an uptiering transaction was unauthorized because it violated bond indentures governing the debt. The decision was a win for bondholders including JPMorgan and BlackRock, who were excluded from the transaction, and a blow to Incora’s financial sponsor Platinum Equity as well as deal participants Pimco and Silver Point.

More recently, asset manager Black Diamond filed a lawsuit against Del Monte Foods on behalf of lenders to force the food company to remove its board of directors. That came shortly after Del Monte struck a deal to raise new money and exchange existing term loan debt into second and third out debt.

This is not to say third party proposals have been entirely unsuccessful. Out of at least 31 LME transactions that 9fin tracked since the start of the year, third parties provided some form of capital to three companies. 9fin observed that these transactions, with the exception of DISH DBS, were done by private equity-backed companies.

One such third-party deal was done by KKR-sponsored Global Medical Response in May. The emergency medical transport provider inked a deal that pushed its debt wall to 2028 and raised new equity from both new and existing investors. 9fin previously reported how the company’s plans for a $948m preferred equity raise drew interest from its private equity backer KKR and existing second-lien lenders, including Ares Management.

In October, Clearlake’s Alkegen inked a refinancing deal that involved both new and existing lenders, including Oak Hill Advisors and Apollo. The specialty materials manufacturer, formerly known as Unifrax, replaced its existing revolver and first lien term loans with a new $200m first-out revolver due 2028 and $1.385bn in new first lien term loans due 2029 with a part-PIK option for the first two years.

In addition, the company issued a new $365m first lien PIK-toggle notes and a new $175m delayed-draw term loan both due 2029. It has also issued $792m of new second lien PIK toggle notes due 2029 in a private debt exchange.

The sharp dichotomy between the number of third party-led deals and transactions involving existing lenders may not last forever, partly because of the glut of dry powder and intense competition in the private credit market. The average size of a private credit fundraise reached almost $1.75bn in the first six months of 2024, the highest of any recent half year, according to 9fin data.

Now that existing lenders have navigated multiple LME deals, they are approaching the negotiation table with greater sophistication, seeking better and better economics, as it’s becoming increasingly clear that the threat of doing third party deals no longer holds substantial real power, while non-ad hoc group lenders are possibly more willing to litigate over deals that put them in worse off positions even if it’s not a zero-sum deal, sources said. In this case, it could force companies to accept more third-party proposals.

“They want to maintain that threat,” Schaible said. “If no one ever does a deal away, it becomes less of a threat against the existing lenders in the next deal.”

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LME trends — Creditor-led LMEs dwarf third-party financing deals

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